1 IENG 301/302 – Fall 2013 Instructor: Paula Jensen Phone: 394 – 1770 E-mail:...

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IENG 301/302 – Fall 2013IENG 301/302 – Fall 2013

• Instructor: Paula Jensen•Phone: 394 – 1770•E-mail: paula.jensen@sdsmt.edu•Office Hrs:

MW 10-11 IER 307T/TH 8:50-9:10 CB 307T/TH 10:40-11:30 IER 307

• Class website:Http://pjensen.sdsmt.edu

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Course ObjectivesCourse ObjectivesCourse ObjectivesCourse Objectives

1. Solve problems in a manner expected on the Fundamentals of Engineering exam.

2. Evaluate personal finance choices.

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Required Materials Eshenbach, T. (2011). Engineering Economy (3rd ed.).

New York NY: Oxford University Press. 591pp. ISBN 978-0-19-976697-0

Engineering Notebook – 9-3/4" x 7-1/2", 5x5 quad-ruled, 80-100 pp. (approx.).

Engineering Problems Paper – 8-1/2" x 11", three hole drilled, ruled five squares/division, 50 pp. (approx.).

FE Supplied-Reference Tables for Eng. Econ.

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Engineering Notebook

Anything you can copy, cut, staple, paste, glue, or otherwise persuade to live permanently within the covers of your engineering notebook may be used on the exams …

EXCEPT old exams and other’s notebook pages.

MUST HAVE in your notebook by next class:

FE Supplied-Reference Tables for Eng. Econ.

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FE Supplied-Reference Tables

Go to www.ncees.org Exams Study Materials Fundamentals of Engineering FE Supplied-Reference

Free Preview Read & Accept Terms FE Supplied-Reference Handbook as multiple PDF

files Engineering Economics

Save the file to your computer Print these out, cut & paste into your Eng. Notebook

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Course StructureCourse Structure• Grading: Percentage

• Weighting: 302 301

•Assignments 15%20%

•Interaction 5% 5%

•Exam I 20%25%•Exam II 20%

25%•Exam III 20%

25%•Exam IV 20%

--

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PoliciesPolicies• Out of Class Assignments:

•Due at class (or earlier)•No late work – drop lowest scoring HW

• Interaction Assignments•Due in class•Schedule to makeup if gone for sponsored activities ahead of time.

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Assignment StructureAssignment Structure

• Format for most problems:•Find (objective)•Given (organize relevant data, only)•Cash Flow Diagram (rarely dropped)•Soln. (steps to solve):

•Write equation in Table Factor Form•Convert to values (or equation forms)•Double underline answer to question

• Turn in on EP Paper•Stapled w/ name!•Not graded if illegible!

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•Exams:•Open engineering notebook•Closed text, etc.

•Put FE reference tables in notebook

•Make-up Exams•Sponsored activities schedule ahead of time•Otherwise, add extra weight to next midterm

•No make-up Final

Email Policy:

If you are writing about issues relating to the class, make sure the subject line reads IENG 301 or 302: (subject info) so I can sort my e-mails and answer accordingly.

Please be professional in your e-mails. (no texting lingo!)

Academic Honesty

Cheating: use or attempted use of unauthorized materials, information or study aids

Tampering: altering or interfering with evaluation instruments and documents

Fabrication: falsification or invention of any information

Assisting: helping another commit an act of academic dishonesty

Plagiarism: representing the words or ideas of another as one's own

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Assignment #0Assignment #0

Name Course IDPreferred name Term / YearYour SDSM&T E-mail address

Your major and anticipated graduation dateYour hometown

Anything else the instructor should know about you

ADA

Students with special needs or requiring special accommodations should contact the instructor and/or the campus ADA coordinator, Jolie McCoy, at 394-1924 at the earliest opportunity.

What is Engineering Econ?

It evaluate the money side of engineering problems.

It answers questions like: When should I buy this? How many payments should I make? Does this take into account all the

stakeholders in the change? When does the cost benefit take place? Which project should we do?

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Engineering Econ Engineering Econ ProcessProcess

Engineering Econ Engineering Econ ProcessProcess

• Identify alternative uses for limited resources

• Obtain needed data (not this class)

• Analyze data to determine preferred alternative:

•Screening decisions(meets minimum acceptable?)

•Preference decisions (Select from competing

alternatives)

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Typical DecisionsTypical DecisionsTypical DecisionsTypical Decisions

• Cost reduction (e.g., equipment, tooling, facility layout)

• Capacity expansion (e.g., to increase production, sales)

• Equipment / Project selection

• Lease or buy decisions

• Make or buy decisions

• Equipment replacement

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Lets Get Started…Lets Get Started…Lets Get Started…Lets Get Started…

• Would you rather have $10 000 today or $10 000 five years from now?

• If you don’t need it right now, what could you do with it?

• Would it be worth the same in five years?

• Money changes value with time!

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Rate of ReturnRate of ReturnRate of ReturnRate of Return

• (ROR) is the rate of change in value earned over a specific period of time – expressed as a percentage of the original amount

Period Ending Amount – Period Starting AmountPeriod Starting Amount

• The Rate of Return is a measure of how much risk there is in an investment

Higher Risk Higher ROR

x 100%ROR =

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Rate of Return and Rate of Return and InterestInterest

Rate of Return and Rate of Return and InterestInterest

• The Interest Rate (i) is the percentage change in value earned over a specific period of time.

• For simple interest, a return is earned only on the original amount (principal, p) each period.

• If the principal is invested for n periods:Total Money Returned = p + (p)(n)(i)

Total Interest Earned = (p)(n)(i)

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Compound Compound vsvs Simple Simple InterestInterest

Compound Compound vsvs Simple Simple InterestInterest

• For simple interest, a return is earned only on the original principal each period.

• For compound interest, a return is earned on the entire amount (principal + total interest already earned) invested at the beginning of the current period.

• Effectively, you are also earning interest on your interest (and on your investment principal)!

• Unless explicitly stated otherwise, this course uses compound interest.

(And so does the rest of the world!)

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Using Compound Interest to Using Compound Interest to Make Economic Decisions …Make Economic Decisions …Using Compound Interest to Using Compound Interest to Make Economic Decisions …Make Economic Decisions …

• Paid $100,000 for it - 3 years ago

• Don’t need it now• Option 1 – Sell it for $50,000• Option 2 – Lease it for

$15,000 for 3 years. Sell

it for $10,000 at the

end of the lease.

Note:Leases typically pay at the beginning of a time period.Loans typically pay at the end of a time period.

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Questions?Questions?Questions?Questions?

• What about the $100,000?•The $100 K is irrelevant - it is a sunk cost, and makes no difference in the decision at this point in time.

• How do we select between the options?

•We need to know under which conditions we would be economically indifferent (equivalent) - have the same amount of money at the same time - and then if the conditions are better for one option, we will select that option.

• Any other factors?•Since we need to account for the time value of money - we need to know the interest rate and the compounding period.

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Cash Flow DiagramsCash Flow DiagramsCash Flow DiagramsCash Flow Diagrams

$15 k

0n =

$15 k

1

$15 k

2

$10 k

3YRS

OPTION 2:

$50 k

0n = YRS

OPTION 1:

31 2

F3?

F3?

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The QuestionThe QuestionThe QuestionThe Question

• Under what conditions would I be indifferent between Options 1 & 2?• Indifferent means Economically

Equivalent:– Have the same amount of money

at same point in time, after accounting for all of the cash flows.

– In this case, 3 years from now.

• Interest Rates…– Percentage– Compounding annually

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Future Value in 3 Future Value in 3 years…years…

Future Value in 3 Future Value in 3 years…years…

I% Option 1 Option 22.5% $53,844 $57,2885.0% $57,881 $59,6527.5% $62,115 $62,09410% $66,550 $64,615

At what interest rate, am I indifferent between the two options?• They are economically equivalent at

an interest rate just a little less than 7.5%

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Option 1Option 1Option 1Option 1

50,000 nowi = 10% compounded annually

F1 = 50,000 + 50,000 (.10) = 55,000

F2 = 55,000 + 55,000 (.10) = 50,000 (1 + .10)2 = 60,500

F3 = 60,500 + 60,500 (.10) = 50,000 (1 + .10)3 = 66,550

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Generalizing …Generalizing …Generalizing …Generalizing …

P = Present value at the beginning of first

period.Fn = Future value at end

of n periods in the future.

Fn = P (1 + i)n = P (F/P,i,n)

so … (F/P,i,n) = (1+i)n

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Standard Factors Used Standard Factors Used to Solve ECON to Solve ECON

ProblemsProblems

Standard Factors Used Standard Factors Used to Solve ECON to Solve ECON

ProblemsProblems( F / P, i, n) Find F Given P( P / F, i, n) Find P Given F( F / A, i, n) Find F Given A( A / F, i, n) Find A Given F( P / A, i, n) Find P Given A( A / P, i, n) Find A Given P ( P / G, i, n) Find P Given G( A / G, i, n) Find A Given G( F / G, i, n) Find F Given G

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Tables…Tables…Tables…Tables…

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Tables…Tables…Tables…Tables…

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… … or Formulas …or Formulas …… … or Formulas …or Formulas …

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… … or Formulas …or Formulas …… … or Formulas …or Formulas …

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Future Given Present

P is the present value at Time 0 F is the future value at Time n

(n compounding periods in the future)

i is the effective interest rate

0 n

P

F ?

1 2 3

F = P(F/P,i,n)

i=?

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Tables…Tables…Tables…Tables…

= i

F3 = 50 000(F/P,10%,3)F3 = 50 000(F/P,10%,3) = 50 000(1.3310)F3 = 50 000(F/P,10%,3) = 50 000(1.3310) = $66 550

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Formulas…Formulas…Formulas…Formulas…

F3 = 50 000(F/P, 10%,3)F3 = 50 000(F/P, 10%,3) = 50 000(1+.10)3F3 = 50 000(F/P, 10%,3) = 50 000(1+.10)3 = 50 000(1.3310)F3 = 50 000(F/P, 10%,3) = 50 000(1+.10)3 = 50 000(1.3310) = $66 550